Hockey's new trick: cutting is really spending

Chief political correspondent

"This challenge is political as well as economic": Hockey's 2014 Budget Photo: Alex Ellinghausen

As the storm clouds gathered in 2008, Labor was told to spend the lot.

"Go early, go hard, and go households" came the now famous advice from Treasury. It was like a licence to become popular.

This week, with the clock ticking down to the Coalition’s first crucial budget, there was another piece of advice kicking around. Former Treasury official and now director at the firm Macroeconomics, Stephen Anthony, urged Joe Hockey to "cut early and cut hard". Not quite as pleasant perhaps, but equally clear.

Anthony went on to say, "there will never be a better chance than now to fix the budget".

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It has been rather hard to get an accurate read on the government’s pre-budget positioning given that through the earlier part of this year, Hockey has at times flagged a mild, even stimulatory budget, rejecting any sudden contractions that would "undermine improving economic growth in the budget".

"We’re not going to do that. We want the economy to grow faster, to give people more jobs. That’s what we want," he said last month.

If there is any confusion in voters’ minds, it is because Hockey is planning a budget which does both - stimulate now and cut later - which will be a pretty neat trick if he can pull it off. The pitch involves convincing people that cutting is the new spending - the only lever left to governments across the developed world.

Monetary policy has no leeway left in it with the cash rate already at rock-bottom. Ditto for fiscal policy with the Commonwealth’s balance sheet, like so many countries, already heavily in the red ruling out significant new spending.

His answer? Structural reforms aimed at trimming costs and bridging the remaining fiscal shortfall with new activity making for new revenue. Or as Hockey put it this week: "Real reforms to our economies in order to lift the overall level of growth and therefore everyone will benefit".

In the frame are the projected growth rates of several massive expenditure programs - some of which will start to really bite into the budget towards the end of its four-year cycle and beyond - the national disability insurance scheme, the promised return to 2 per cent growth in real terms of defence spending, and increased Commonwealth expenditure on school education.

Along with the burgeoning bill for health and the aged pension, these things add up to a worsening structural deficit - a permanent and widening gap between what we raise in tax revenue and our fixed costs every year.

Treasury boss Martin Parkinson nailed the problem a fortnight ago noting that the NDIS and "Gonski" school reforms will add $3.1 billion and $2.8 billion to total spending over the forward estimates. But it’s beyond that four-year period that the costs really begin to gallop with the NDIS rising to be $11.3 billion annually in 2023-24.

“What is less well understood is that total Commonwealth expenditure on health is anticipated to rise from $64.7 billion in nominal terms to $116 billion in 2023-24," he told the Sydney Institute.

“Similarly, our three main pension payments - the aged pension, disability support pension, and carers’ payment - grow at an annual rate of 6 per cent per annum in nominal terms over the forward estimates, adding around $13 billion to annual payments by 2016-17, and another $39 billion by 2023-24."

Anthony estimates the task of making the budget sound again will necessitate phased but nonetheless rapid spending cuts equal to $16 billion a year - that is a permanent reduction in fixed outlays of around 1 per cent of GDP.

Clearly this challenge is political as well as economic.

Tony Abbott has made it clear he intends keeping his promises - all of them, with no exceptions.

Yet there are strong signals that the aged pension, about which he made an ironclad promise of no change before the election, is to be trimmed. Choices on the table include a lower indexation arrangement, a new assets threshold involving the family home, and delaying the eligibility age to 70.

There is also speculation that some taxes will be increased, and middle-class welfare cut - Family Tax Benefit B in particular - as well as other welfare supplements.

Abbott knows many of these changes can only commence after 2016 if he is to keep his promises, giving the electorate a chance to cast judgment.

289 comments

Perhaps you underestimate voters Mr Kenny. Some who think that the government can keep spending without any consequences might feel betrayed, but most are economic rationalists and know it has to stop.

To Wayne Swan, perhaps the most beautiful words he ever heard we "go early, go hard", because he sure listened to them, and launched the most extravagant spending spree in Australian fiscal history. Joe needs to deal with the consequences, including the burgeoning pensions, NDIS and health, all somehow without breaking the Abbott promises.

In hindsight perhaps he made a few promises too many given the state of the budget. Although it will be interesting if the budget does break promises, but not until after the next election giving the people the chance to pass judgement, whether they will be seen as broken promises. A little reminiscent of Howard's never ever" GST. A juggling act indeed.

Commenter

Hacka

Location

Canberra

Date and time

April 18, 2014, 8:37AM

The first budget is the only time a new government can restore financial discipline, and Rudd never had any intention doing anything like that, his claim to being a 'fiscal conservative' was like all of his claims, overblown and ego-image driven schlock.

Commenter

SteveH.

Date and time

April 18, 2014, 9:08AM

More like Mr Kenny has misestimated the voters completely. They are no longer the same voters he is used to. They have become very pragmatic, even cynical, and no longer believe this crap about the lucky country.

Commenter

Lewis

Location

Sydney

Date and time

April 18, 2014, 9:20AM

7 months until the Victorian Nov state election to send a clear message to Abbott and Hockey about their Commission of Audit savage spending cuts, tax hikes, broken election promises and $130 billion sale of our public assets including land, natural resources, roads, ports, energy providers to the Chinese government, domestic and foreign property developers.

I reckon all of these would fix the budget. As Joe said "the age of entitlement is over".

So Hacka, do you see Joe actually doing any of these things and making the tough decisions?

No, I don't think so either. All of that revenue that Howard and Costello frittered away and gave back in re-election bribes, the tough decisions that Swan was too gutless to make, well they're coming home to roost now.

The reality is both sides have let this country down badly.

Commenter

russ

Location

melb

Date and time

April 18, 2014, 9:23AM

All those 457 s are going to increase the company's margins. Lets not forget the Tpp is all about corporations. What is hockey going to do for citizens of Australia. A bowl of rice a day.

Commenter

Robin Hood

Location

Sherwood Forest

Date and time

April 18, 2014, 9:25AM

Smoke and mirrors Hacka, all Joe is doing is shifting the government debt (which in reality is not that big) onto the us "voters", we get to borrow more money and pay for services on our credit cards. Things like health education and pensions, that our taxes once paid for are now - according to Joe - "entitlements" that must be terminated so the the tax revenue can be more fairly distributed to the more deserving wealthy.

Commenter

Dreyfus

Location

Grafton

Date and time

April 18, 2014, 9:25AM

Hacka

What burgeoning pensions? It has obviously escaped you that the Australin population increased by over 4 million people since 2000, so where is the ageing population. Not to mention that compulsory employer superannuation has been in force for almost 25 years and in another 20 years superannuation will account for the vast majority of OA pensions. But I suppose your script from Liberal head office left these two realities out so the idiocy of it does sound like what it is.

Commenter

Pen of hrba

Date and time

April 18, 2014, 9:28AM

You at work today Hacks? Plenty to do I suppose. Preparing the budget for of all the promises that you're team are about to break.

So it's OK, if Joe and Tones breaks a few promises huh? But not if the other side does it?